Foreign investments

Vietnam emerges as a big competitor to India to attract foreign investment

Vietnam emerges as a big competitor to India to attract foreign investment

US companies pulling projects out of China choose between the two

By Subrata Majumder

Prime Minister Narendra Modi’s Atmanirbhar Bharat Abhiyan campaign aims to make India a global supply chain, senior Foreign Ministry officials have said. Tax breaks, modified PLI scheme, digitalization, massive investments are the foundations of India’s emergence as a future global supply chain manufacturing hub.

At the Supply Chain Resilience Forum, as part of the IPEF (Indo-Pacific Economic Framework) Summit in May 2022, Prime Minister Narendra Modi asserted himself for the construction of a manufacturing center for the Supply Chain. This reverses the seeds of India’s strategic shift towards the manufacturing supply chain and its potential. Currently, for most of the new age manufacturing like electronics and digitalization, the manufacturing takes place in an assembly operation in India and most of the components, parts are imported.

According to Mr. Chris Devenshire Elliis of Dezan Shira & Associates, Hong Kong, China is no longer a manufacturing powerhouse. As the US-China war escalates and China pursues a zero-COVID strategy, there are many opportunities for other Asian countries to be an alternative to China. To this end, Vietnam has emerged as a promising alternative manufacturing destination to China for the United States, South Korea and Japan.

But India is no exception. The truth is that Vietnam has taken the spotlight with the United States and Korea moving their production facilities. But the irony is that US investment was four times greater in India than in Vietnam. In 2021, US investment in India was US$8.5 billion, compared to US$2.7 billion in Vietnam.

Vietnam has become a new destination for the China+1 strategy for investors. Instead of abandoning investments in China, investors preferred to supplement operations in China with low-cost manufacturing in Vietnam. According to Mr. Kyle Freeman, partner and director of Dezan Shira & Associates, “Even before the start of the trade war between the United States and China and more recently the outbreak of the COVID 19 pandemic, Vietnam offered the alternative most competitive in China for general manufacturing”. .

The advantages that attracted investors were a stable government, accustomed to a similar cultural commonality in doing business with China, low labor costs, a business-friendly tax regime and proximity to the supply chain. preexisting in Asia. Another factor, which drove foreign investors out of China, was China’s transition to consumption-led growth, which was apprehended to push cost factors due to rising wages, especially in the coastal areas where export-oriented companies, mainly with foreign capital, have regrouped.

Major US investors, such as Apple, Intel, Qualcomm, Universal Alloy Corporation, Nike, Key Tronics EMS and Samsung from Korea have settled in Vietnam.

Although India has not come into the limelight as an alternative to China over Vietnam for supply chain manufacturing, it has several factors to leapfrog Vietnam. First, it has a larger domestic market and a more skilled labor force than Vietnam, such as in manufacturing IT operations. Second, its salary levels are only slightly higher than in Vietnam. Third, it is far ahead in digitalization than Vietnam. Finally, India’s political stability and strong democracy are ensured by its independent judiciary, which reaffirms India’s strength over Vietnam.

According to a JETRO survey, the annual compensation of workers in Indian manufacturing was US$3,982 in 2017, compared to US$3,673 in Vietnam. Compared to the level of wages in China, wages in Vietnam were 63% cheaper compared to 61% cheaper in India. The marginal difference in salary level is compensated by a greater competence of the Indian workforce in terms of IT solution.

Currently, India’s middle class market is 250 million, which is similar to China. It provides a solid base to insulate itself as the global export market is in a state of volatility due to the trade war between the United States and China and the dispute between Ukraine and Russia. On the other hand, Vietnam is courted by a small domestic market and its excessive dependence on exports justifies a higher market risk. , India is now one of the few countries where cheap labor and a large affluent consumer class go hand in hand.

To accompany the global strategic shift in manufacturing, India is poised to woo domestic and foreign investors by encouraging supply chain manufacturing. The launch of a new PLI (Production Linked Incentive) scheme model is a good example. One of the key changes to the policy is the broadening of the scope of the scheme. So far, only 3 industries were covered by the scheme. Now, 13 industries have been included in the scope.

Under the PLI program, the government offers incentives of 4-6% on additional sales of manufactured goods for 5 years during the qualifying period. In the new LIP template, guidance has been given on supply chain industries primarily relating to IT and digital industries.

Recently, the Ministry of Electronics and Telecommunications (MeitY) approved a comprehensive policy for the development of the semiconductor and display manufacturing ecosystem. Under this policy, the government will provide incentives worth Rs 760,000 million over a period of 5 years. Simultaneously, under the PLI scheme, the government will provide incentive support of Rs 553,920 million ($7.5 billion) for hardware manufacturing and the development of electronics manufacturing clusters.

According to the Asia Briefing survey, India is neck and neck with Vietnam in terms of labor productivity growth and wage levels, except for bureaucracy. Antiquated bureaucracy has tarnished India’s promising parameters for foreign investment opportunities, causing delays in multiple approvals and increasing the cost of projects.

Nevertheless, US investment has surged in India. The paradox of investment in the United States is that it has defied the COVID 19 pandemic, which has crippled the manufacturing sector and flooded in investments, commensurate with the rise in digitalization. (API Service)